Income inequality effect of public utility infrastructure: Evidence from rural China

Abstract

The income inequality effect of infrastructure investment is under-researched despite the fact that the world has been confronted with the formidable challenge of worsening income distribution. This paper addresses this gap by: (i) highlighting deficiencies in conventional inequality modeling, (ii) proposing an empirical framework that entails estimation of both income growth and income inequality effect of infrastructure using one model, and (iii) applying this model to individual-level data from rural China to estimate income growth and income inequality effect of specific public utility infrastructures. Our findings reveal that the usage of telephone and tap water infrastructure fosters rural income growth, particularly benefiting lower-income individuals, indicating benign income inequality effect. These effects are particularly notable in inland China. An investigation into underlying mechanisms shows that public utility infrastructures help improve educational attainment and health status in lower-income rural households, stimulating growth in income and reducing income inequality. These findings imply that development of public utility infrastructure can serve as a powerful policy instrument for government interventions to reduce income inequality and promote growth, especially in developing countries.